Listed property trusts restore faith from within

Australia’s listed property trusts have embarked on a wave of share buybacks in the past year, snapping up stock as they pocket the proceeds of asset sales.

Fund managers have applauded the buybacks as a step towards restoring faith in the Australian real estate investment trust sector, which has lacked investor support since the share-price slump experienced in the global financial crisis. The strategy is already paying off for the vehicles and their stockholders, and the groups involved in buybacks are beating the sector average and the wider market’s total returns.

Citi says REITs that have announced buybacks have provided total returns of 6 per cent since announcing their programs, about 250 basis points ahead of the sector average and 620 basis points ahead of the Australian bourse.

Citi analysts say this is an impressive outcome, given most REITs have only executed a modest slice of their announced buybacks.

Diversified DEXUS Property Group is the most recent vehicle to jump on the bandwagon, confirming the sale this week of its US industrial portfolio for $US770 million and a $200 million buyback.

There are now five active buybacks, including those of market giants Stockland, Westfield Group, and GPT Group. Charter Hall Retail REIT has completed its buyback, while DEXUS’s has yet to launch. The total amount of buybacks is $3.8 billion – or 5.7 per cent of the sector’s market capitalisation, according to Citi.

The appeal to vehicles is clear. While opportunities to cheaply buy high-quality domestic assets is limited, they can purchase their own stock at a discount, effectively improving their portfolio without incurring transaction costs.

“We have been advocating that the REITS undertake buybacks for the past two years,” BT Investment Management's head of property securities, Peter Davidson, says.

“We see buybacks as a useful tool of capital management, another lever for management to pull on to improve returns. Therefore we are delighted to see the level of buybacks across the sector.”

Davidson says buybacks are a clear indication the sector will not be issuing new stock soon.

The news will be a relief to long-suffering stockholders who were diluted by shares issued in heavily discounted capital raisings in the post-GFC period.

“They are no longer just paying lip service to the notion of better capital management,” he says.

“For too long, the REIT sector has been treated as an equity ATM by trust management teams and their investment banking advisers.”

Phoenix Portfolios managing director Stuart Cartledge says buybacks are a means of restoring investor faith in listed property groups. “I’m a fan – they are restoring credibility to the sector,” he says. “It’s a very effective use of capital when your shares are trading cheap.”

All the buybacks are earnings and net tangible assets accretive, Cartledge says, but he questions the merit of small buybacks such as CFS Retail’s, which is buying back 3 per cent of the company’s stock.

“A 3 per cent buyback – why bother? If a buyback is a good idea, do it in a meaningful way.”

Buybacks are unlikely to provide short-term share price upside to the trusts, with management keen to not artificially inflate stock price by dominating share trading, with most spacing their buyback over a number of months and putting a price cap on their purchases, Cartledge says

The benefits are more likely to be in the form of improved overall performance in the longer term, with stocks yielding more than the debt taken out to buy them.

Despite their improved performance, the sector continues to trade below its net tangible asset backing, with most trading at a 10 to 20 per cent discount.

With buybacks proving their worth so far, the Citi analysts are flagging additional – and expanded – buyback campaigns from the sector, with Mirvac Group a potential candidate.